business

When Boston Scientific Corp. won Guidant Corp. in early 2006 after a fierce bidding war with Johnson & Johnson, the $27 billion deal was considered by some observers to be so costly that victory was nearly indistinguishable from defeat.

The costs to Boston Scientific since then have included a sharply lower stock price and an increased debt load. On Monday, the company's Minnesota employees learned that there is another price to pay: About one of every six of the 3,300 people at the firm's cardiac rhythm management division in Arden Hills will lose their jobs.

The 500 to 600 workers being cut are in research and development at the facility, which was part of Guidant before Natick, Mass.-based Boston Scientific acquired it. The company also has more than 3,000 workers at operations in Plymouth and Maple Grove.

Boston Scientific said the job cuts will allow it to focus on developing the most promising products.

"This plan will shift resources from less productive projects to more productive ones, reinvigorating our product pipeline and driving top-line growth," said Jim Tobin, Boston Scientific's president and CEO.

However, the cost-cutting comes at a time when competitors -- including Fridley-based Medtronic Inc. and Little Canada-based St. Jude Medical Inc. -- are increasing their own R&D efforts, traditionally the backbone of medical device businesses.

"One has to question how Boston Scientific will remain competitive at a time when it has to seriously curtail a lot of those activities," said Phil Nalbone, securities analyst at RBC Capital Markets in San Francisco.

"I'd say they're doing this from a position of weakness and not strength. It's a retrenchment at a time when there are significant challenges to rebuilding the business and when their competitors are building their businesses fast."

Workers at the Arden Hills facility will be notified by the end of February who will go and who will stay, said Paul Donovan, Boston Scientific senior vice president for communications. The departures are expected to be completed before the start of the second quarter, he said.

Boston Scientific, which now has $9 billion in debt, last month saw its credit rating lowered by Standard & Poor's.

Business has tapered in past year

Business has been tougher than was expected when Tobin made the Guidant deal. Since January 2006, the market for $30,000 defibrillators has slowed considerably, and Boston Scientific has had to deal with the fallout from Guidant's recalls of thousands of pacemakers and implantable cardioverter defibrillators (ICDs), recalls that occurred after a small number malfunctioned.

Somewhat ironically, Boston Scientific also said Monday that it is seeing a turnaround in its cardiac rhythm management unit, with net sales up 10 percent, to $489 million, in the fourth quarter of 2006. That compares with $446 million in the third quarter.

That's still off from the 15 to 20 percent growth the company was expecting only a year ago, but much better than the 5 percent pace analysts had recently anticipated.

One analyst described the layoffs as an effort to pare the company and bring it in line with lowered expectations.

"I think it was a large acquisition, maybe a bite that was a little too big," said Thomas Gunderson, a securities analyst at Piper Jaffray & Co. "It's a little harder to swallow, but eventually it will be digested. In two or three years, the company will be bigger and stronger.

"Strictly from a financial standpoint, Wall Street is going to see the news as a step in the right direction," Gunderson said.

Medtronic remains the market leader for ICDs, with Boston Scientific and St. Jude vying for the No. 2 spot.